Debt-to-Income Ratio for a Vehicle

If you want to qualify for an auto loan, odds are you know your credit score and you probably know the current interest rates. Armed with this information, you may think you know everything you need to know to get a good car loan. However, youre forgetting one vital piece of information -- your debt-to-income ratio. Like your credit score, your debt-to-income ratio can affect whether you get a loan and what kind.

Definition

Your debt-to-income ratio is the amount of income you have left each month after you pay your debts, including student loans, credit card payments, mortgages and car loans. Calculating your debt-to-income ratio is relatively easy. Add up all of your recurring monthly debt payments, and divide them by your monthly take-home income, which is your income after taxes and other withholdings. The resulting percentage is your debt-to-income ratio.

Suggested Ratios

Acording to Bankrate, you should keep your debt-to-income ratio below 36 percent, as many banks and finance companies will not lend to you if you have a ratio over this amount. However, MSN Auto recommends that you keep your ratio under 20 percent, and Consumer Credit Counseling Services told MSN Auto that you shouldnt take on a car loan unless your ratio is lower than 15 percent.

High Ratios

If your debt-to-income ratio is high, you might be denied for an auto loan. Some car loan companies still offer loans to people with high debt-to-income ratios, but these loans will be less than desirable. They often have high interest rates and if you start struggling to pay you might not be cut the same slack that someone with a better ratio would receive.

Improving Your Ratio

To improve your debt-to-income ratio, you have to either increase your income or decrease your debt. Because increasing your income can be difficult, and it wont get rid of debt problems, the best way to improve your ratio is to decrease your debt. Create a repayment schedule that will allow you to slowly pay off debt, or work with a credit counselor to establish a plan before you get an auto loan if you are concerned you may not be able to make payments.